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The economic and policy structure of energy transitions

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This presentation will summarise key structural lessons from quarter of a century’s debate and experience in seeking to foster low carbon energy transitions, offering a new framework to explain how climate and energy challenges can be tackled more effectively whilst containing energy bills. It will explain three domains of socioeconomic processes each of which involves different actors and decisionmaking characteristics. These three domains operate at different scales of time and social entities and rest on different theoretical foundations. The unique characteristic of energy and climate change is that the issues raised span all three domains in approximately equal measure. The policy implication is the need for three distinct pillars of action, each being approximately equally important.

Drawing on the book Planetary Economics, co-authored with Professors Hourcade and Neuhoff, the presentation will explain from these foundations how the different pillars are complementary and why only packages spanning all three are credible, economically efficient and environmentally effective – and hence, politically stable.

Carbon Markets: Past, Present and Future

B. Pizer (Sanford School of Public Policy, Duke University, Duke, United States of America)

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Carbon Markets: Past, Present and Future

B. Pizer (1) (1) Sanford School of Public Policy, Duke University, Department of economics, Duke, United States of America

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Carbon markets are substantial and expanding. There are many lessons from experience over the past 10 years: fewer free allowances, careful moderation of low and high prices, and a recognition that trading systems require adjustments that have consequences for market participants and market confidence. Moreover, the emerging international architecture features separate emissions trading systems serving distinct jurisdictions. These programs are complemented by a variety of other types of policies alongside the carbon markets. This architecture sits in sharp contrast to the integrated global trading architecture envisioned 15 years ago by the designers of the Kyoto Protocol and raises a suite of new questions. In this new architecture, jurisdictions with emissions trading have to decide how, whether, and when to link with one another, and policy makers overseeing carbon markets must confront how to measure the comparability of efforts among markets and the comparability of markets to a variety of other policy approaches.

An important recent development is the 2014 U.S. Environmental Protection Agency (EPA) proposed rules to regulate fossil fuel power plants under existing U.S. law. Final rules are expected this summer. The rules’ key features include state-by-state emissions rate targets and considerable flexibility for the states to achieve them. This flexibility includes the states’ choice to implement the targets through traditional regulation or the use of carbon markets. If implemented through carbon markets, states face additional questions about carbon market design. Different strategies for emissions reductions and regulation design will have important near-term consequences, in terms of the cost of electricity generation and market prices, and important long-term consequences, in terms of retirements and new investments. These consequences can vary significantly from region to region and from stakeholder to stakeholder.

The long-term consequences are particularly important in terms of the legacy for future policies. If current regulations turn out to be inadequate to address future mitigation goals, debate could begin again over federal legislative options, namely, a tightening of the existing program, an explicit national trading program, emissions taxes, or other alternatives to reduce emissions such as renewable or clean electricity goal. In this event, it will be important to understand how responses to the current proposed regulation may both affect the ability of the electricity industry to respond cost effectively to any new policies in the future as well as the distribution of future costs across stakeholders.

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Carbon Pricing Future in China

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A global 2 Degree temperature increase was identified as a political target for climate change. The newly published IPCC AR5 presents a lot of research on scenarios, policies for the 2 degree target. Carbon pricing is one of the key policy options for CO2 emission mitigation. In China, CO2 emissions trading was adopted as a policy for China’s low carbon development. The emission trading was launched in 2011 in 7 pilot cities and provinces. An implementation of carbon tax in China was widely discussed, and now is under decision making process in government. This presentation summarizes the analysis of a carbon tax based on IPAC model simulation, and discusses the choice between carbon tax or emission trading in China. In the modeling analysis, in order to support the global 2 degree target, CO2 emissions in China have to reach peak before 2025 and then start deep cut on CO2 emissions. In IPAC modeling analysis, feasibility analysis for this emission scenario was developed. By using this detailed analysis modeling tool, it is feasible for China to peak CO2 emissions before 2025, and start deep cut after that, reaching more than 70% cut by 2050 compared with that in 2020. In the analysis, various policies were considered, including energy efficiency improvement, fuel switching in end use sectors, low carbon power generation, land use mitigation, carbon pricing etc. Based on China’s policy making regime, these policies could be implemented in different government agencies according to their functions. There has been a significant progress on energy efficiency improvement since 2005 when China started the energy conservation program as a national fundamental strategy. And in recent years, renewable energy development in China is also playing the main role in the world, accounting for nearly one third of the global production capacity for renewable energy added per year.

However, we do need to consider an economic method for GHG mitigation in China. We have started analysis on carbon tax and emission trading from 2005, by now ETS is undergoing, and a carbon tax was proposed to government. In the modeling analysis, it is found that carbon pricing has significant effects on CO2 emissions mitigation to reach the global 2 degree target, and could be implemented in China. By reviewing the progress of ETS in China, we have discussed the advantages and disadvantages of both carbon tax and ETS, and suggested the future pattern for carbon pricing in China. Carbon tax is strongly recommended as a national policy for GHG mitigation. A system to combine carbon tax and ETS in China is also proposed.

India's Energy and Climate Debate: Uncertainties in Future Emissions and the Scope for Co-benefits

N. Dubash (Centre for Policy Research, New Delhi, India)

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India's Energy and Climate Debate: Uncertainties in Future Emissions and the Scope for Co-benefits

N. Dubash (1) (1) Centre for Policy Research, New Delhi , India

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India occupies a dual position in global climate debates. As a large and rapidly growing economy, India’s future energy and emissions trajectory holds considerable importance for global efforts to address climate change. On the other hand, India starts from a very low base of energy use and emissions on a per capita basis, illustrating the considerable future energy needs required if India is to meet the development needs of Indian citizens.

This duality frames Indian climate and energy policy. Given the low levels of current energy usage, poor quality of infrastructure and the need to provide jobs for large numbers of people entering the workforce, the only acceptable starting point from a domestic point of view is India’s energy needs, rather than carbon limitations. However, Indian policy formulation is able to consider climate impacts through explicit consideration of ‘co-benefits’ of alternative development policies. Hence, understanding and operationalising co-benefits is an important theme in Indian energy and climate policy.

This study reviews recent national energy and climate modelling studies to assess the projected range of future emissions, energy demand patterns and energy supply futures. What emerges is a wide variation in projected business as usual futures. Policy scenarios included are a carbon tax, and bottom up demand and supply mix scenarios, leading to a relatively modest deviation from reference cases until 2030.

Key results include: a projected doubling or tripling of carbon dioxide emissions, and an increase in coal use by 2.5-3 times, despite considerable increase in renewable energy use. However, these projections assume continued high GDP growth rates until 2030, which partially drive these results.

Despite the importance of co-benefits, the studies do not systematically assess the co-benefits arising from various climate policies. However, a review of global integrated assessment models applied to South Asia do suggest that air pollution and energy security co-benefits in particular can be considerable.

Looking to the future, the co-benefits framing of India’s climate policy is likely to result in sector by sector policy formulation, driven primarily by sustainable development and energy security concerns, with some attention to climate benefits. The co-benefits analysis suggests that the climate gains in terms of ‘bending the curve’ could be substantial. In order to assess the magnitude of potential reductions in CO2 will require more careful attention to sectoral scenario construction in future model runs.

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Mitigation of Energy-related GHG Emissions in Brazil

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Brazil is one of the largest developing economies in the world. Its long-run developmental pathway needs to face huge challenges, such as: poverty eradication, reduction of inequalities, food security, access to energy and water, public security, technological innovation and competitiveness. Climate change will have to be added to this list, due both to the country high vulnerability to climate change and to its important contribution to global GHG emissions. In this context, this presentation summarizes an analysis of the social and economic implications of different GHG emission mitigation scenarios for Brazil.

Brazilian voluntary commitment to reduce emissions until 2020 shall be reached thanks to the sharp cut on Amazon deforestation achieved since 2004. As the economy grows, emissions related to the combustion of fossil fuels for energy production and consumption have been increasing significantly and are expected to become the dominant source of GHG emissions over the next decade. Mitigation policies and measures, beyond those included in governmental plans, have been identified and grouped in scenarios up to 2030, according to expert judgement on assumptions about its economic and political feasibility, resulting in different penetration rates of technological and management innovations.

Comparative analysis of the scenario results has allowed for highlighting economic (GDP, inflation, trade balance, industrial competitiveness) and social (employment, income distribution, low income household consumption patterns) implications of lower carbon pathways in Brazil. These results provide new insights as an input to the national debate on the strategy to curb down country’s GHG emissions up to 2030.

In the past, different policy tools have been used in Brazil to foster the development of renewable energy in Brazil, including: a mandatory blending of ethanol to gasoline; soft loans to increase ethanol production; fiscal exemptions for planted forests of fast growing species such as eucalyptus and pinus, used for charcoal manufacturing; tendering of hydropower plants to be built through public/private partnerships; feed-in tariffs for power generation from wind farms, solar PV and biomass; among others. These instruments have enabled Brazil to reach a level of 45% of renewable energy in total energy supply in 2010, against a world average of 13%.

Now, different command/control and economic instruments may be used to promote a transition to a even lower carbon energy system: the creation of domestic carbon allowance market is under study by governmental bodies; and the possibility of increasing fossil fuel prices by a variety of taxation schemes is also considered.

The study findings highlight that if command and control measures coupled to microeconomic policies are able to overcome the barriers to mitigation options, decoupling of economic growth and GHG emissions would be possible: additional mitigation scenarios, on the top of existing governmental plans, might increase GDP, employment and household income of the poorer income classes, providing a “win-win” outcome. The gain of income is higher than inflation for low and middle income classes, helping to reach a better income distribution pattern. However, under a global carbon tax scheme, applied on burning of fossil fuels in Brazil as well, GDP is slightly lower. Even though, the use of the carbon tax revenues to decrease labour charges and foster job creation might keep employment levels and preserve social development gains.

The Brazilian case illustrates the relevance of choosing the appropriate instruments to overcome the economic/financial and non-economic barriers to the mitigation options, according to the national circumstances, in order to achieve a transition towards a lower carbon society.